"The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design."--F.A. Hayek

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15 June 2010

Price Gouging?

Let's imagine that you're in a far away place called "North Carolina." It is early September.

Say there's a hurricane. Perhaps it's a nasty hurricane that cuts power to a good many people for a few days. Suppose people affected by this outage realize that they will need ice, whether to keep their refrigerated goods from spoiling, icing down their favorite beverage or keeping their medication stable. Further, let's imagine that a bag of ice typically goes for $1.50 (or so). Also, lots of trees are down, so some roads are impassable.

As stated, there is a hurricane, there is no electricity and no idea when power will be restored. After a few days, what would you pay for a bag of ice?

Let's look at this another way. Say you live a few miles from a town that was just hit with a hurricane, but your town is just fine. Electricity is humming and the town, though hurricane season, is brimming with ice. You know where you can rent a few refrigerated trucks. You have some cash. You have some friends. You smell an opportunity. You rent the refrigerated trucks, you buy a couple hundred bags of ice. You load up your friends and some chainsaws (clear the roads) and you head over to the town that needs what you have. What would you charge for a bag of ice?

Of course there is government involvement here. Not in providing people who need it with ice, not at all. The government has laws "protecting" people from "price gouging." One cannot charge "excessive" or "exorbitant" prices for a good or service--never saying exactly what "excessive" or "exorbitant" might be. Now if you live in the town without power, you might think of price gouging a certain way. And if you lived a few towns over, got an idea, spent some money, cleared some roads and brought necessary goods to people in need, you might have quite another idea of what price gouging actually is.

The government got involved a little further in our little story, because all of this actually happened on or about 06 September 1996 around Raleigh, North Caroline when the big, brutish Hurricane Fran hit land. And some young ruffians brought some ice to those they thought might want or need it. They offered to sell ice to people willing and able to buy it. All exchanges were entirely voluntary, no one was forced to buy anything from anyone. And the bastards were arrested. The people cheered. The trucks were impounded (and turned off). The ice did what it was supposed to do in North Carolina in the summer and it melted, keeping no one's perishables, cooling no one's gin and tonic, preserving no one's insulin.

The whole thing is discussed by Russ Roberts and Mike Mungerhere. There are links to related items on the page. Very good stuff.